When I first started investing just over a year ago I had a choice to make: would I brave it and try to do things myself or would I hand my money over to an adviser or a robot to manage it for me?
In the end I went for the DIY approach. I’ve always preferred to understand how things work rather than blindly trusting someone – or something – else.
But maybe I’m an anomaly in that respect. More than one million people now save via apps where a robot decides how to invest for you. These digital investment services claim to have lower fees than traditional human advisers and allow you to start investing even if you don’t have thousands of pounds in the bank.
How digital investing works
Most offer a number of “ready-made” investment portfolios made up of different percentages of stocks and bonds: you simply pick the one which suits you best based on how much risk you want to take with your money.
Some also tweak these percentages throughout the year, using algorithms to work out when and where to be invested, and others offer fully fledged “robo-advice”, asking you a few questions about your financial goals then letting the cyborgs work their magic.
Now I’m all for new technology that gets young people investing, but, without the help of any robot, I’ve managed to go from not knowing what an equity is to picking seven funds for my portfolio.
If I’d have put £1,000 into each of those seven in January 2019, my Isa would have been worth £8,890 by the end of the year, adding an extra £1,890 (or 27pc) to my savings. That’s taking into account all of the fees I’d have paid to my fund managers, my Isa provider and the costs of buying those funds. Not bad for a first-timer eh?
It’s also much better than most of the ready-made portfolios on these apps.
How do the robots stack up?
One of them, Nutmeg, offers five fixed portfolios. My investing strategy probably falls somewhere between its “growth” and “adventurous” options. These returned around 18pc and 21pc respectively over 2019 – not bad but not quite 27pc. Another, Wealthify, returned just 15pc with its “ambitious” portfolio. The performance figures take all fees into account.
Others charge fees differently, not as a percentage like Nutmeg and Wealthify, which makes comparing like-for-like incredibly difficult. Investing through both Moneybox and Plum costs £1 a month – although the first three months are free with Moneybox and first one free with Plum.
If you’re someone who can only afford to invest a small amount, these charges can quickly stack up. This doesn’t really sit right with me seeing as these kinds of apps sell themselves on the fact they make investing accessible to those who don’t have much to save.
Costs can easily spiral
Someone investing £1,000 with Moneybox at the start of 2019 then £50 a month after that would have made a return of 20pc by the end of the year. Doing the same with Plum you’d have returned 19.6pc taking all fees into account.
But if you weren’t lucky enough to have that initial lump sum and were investing just £50 a month those charges would make a much bigger dent in your returns. With Moneybox you’d paying £9 a year in subscription costs and £11 with Plum. That’s the equivalent of being charged 1.5pc or 1.8pc for your Isa and doesn’t even take into account their extra platform fees and fund fees (around 0.65pc with Moneybox and 0.53pc with Plum in total). The second year you’d be paying even more: a whole 2pc on the money they put in, plus those extras.
Does investing really have to be so complicated?
I’ve managed to pay far less (and perform much better) by doing things myself. It’s not been too complicated either: all it’s taken has been a bit of research over a few evenings a month. I’ve gained a lot besides profit.
I’ve become more conscious of what I’m doing with my money, got a better understanding of economics, and discovered some of the fantastic things that smaller British companies are doing – things which I’m helping to fund, albeit in a very small way.
This financial awareness is important. Robots and apps can’t help you set financial goals or reassure you that you should keep regularly investing even when stock markets crash – all things that I’ve picked up along the way.
Human instinct would tell you that when markets are tumbling you want to pull your money out. But read even the most basic Investing 101 guides and you’ll know that is actually the time you can find some of the best bargains.
And although these bots can tell you where to invest your money, what they can’t do is tell you not to invest at all.
Open Money, a hybrid app combining ready-made portfolios with human advice, has to tell around 80pc of the people who want to start investing with it not to. This is because they are not in a financial position to do so – usually because they are still paying off debts or because they don’t have any rainy day savings stashed away.
At the end of the day, you should try to get at least a basic understanding of investing before you get stuck in and not just put your trust blindly in machines and formulas.
So will you find yourself asking “Alexa, what stocks should I buy today?” in the not-so-distant future? Maybe. But maybe not.